Quorum Health Resources v. Maverick County Hosp.

• Decision Date: 30 September 2002
• Docket Number: No. 00-50699.,00-50699.
• Citation: 308 F.3d 451
• Parties: QUORUM HEALTH RESOURCES, L.L.C., Plaintiff-Appellee-Cross-Appellant, v. MAVERICK COUNTY HOSPITAL DISTRICT d/b/a Fort Duncan Medical Center, Defendant-Appellant-Cross-Appellee, and Texas Hospital Insurance Network, Inc., Texas Hospital Insurance Exchange, Defendants-Cross-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

308 F.3d 451

QUORUM HEALTH RESOURCES, L.L.C., Plaintiff-Appellee-Cross-Appellant, v. MAVERICK COUNTY HOSPITAL DISTRICT d/b/a Fort Duncan Medical Center, Defendant-Appellant-Cross-Appellee, and Texas Hospital Insurance Network, Inc., Texas Hospital Insurance Exchange, Defendants-Cross-Appellees.

No. 00-50699.

United States Court of Appeals, Fifth Circuit.

September 30, 2002.

Rehearing Denied October 29, 2002.

COPYRIGHT MATERIAL OMITTED

Richard Brent Cooper (argued), Michelle Elaine Robberson, Diana L. Faust, Cooper & Scully, Dallas, TX, for Quorum Health Resources LLC.

Creswell Dean Davis (argued), Mark Alan Keene (argued), Davis & Davis, Austin, TX, for Maverick County Hospital Dist.

Appeals from the United States District Court for the Western District of Texas.

Before BARKSDALE and STEWART, Circuit Judges, and ROSENTHAL,^* District Judge.

ROSENTHAL. District Judge:

The primary issue in this appeal is whether a contractual indemnity provision meets the requirements of the Texas express negligence rule, entitling the indemnitee to relief from a judgment based on its own negligence. By cross-appeal, the indemnitee challenges its insurer's compliance with the duty to defend. The insurer, in turn, challenges the insured's compliance with the cooperation clause in the insurance policy.

This court concludes that, as a matter of law, the contract does not meet the Texas express negligence rule's requirements for indemnification of losses arising from the indemnitee's own negligence. As to the insurance issues, the record discloses genuine issues of fact material to determining whether the insurer breached its duty to defend. We reverse the district court's grant of summary judgment, rendering as to the indemnification issue and remanding as to the duty to defend issues. The reasons are explained below.

I. Background

In 1990, Quorum Health Resources, L.L.C. ("Quorum"), a hospital management company, entered into a Management Agreement with the Maverick County Hospital District d/b/a Fort Duncan Medical Center (the "Hospital").¹ The Hospital was insured by the Texas Hospital Insurance Exchange and Texas Hospital Insurance Network, Inc. (collectively, "THIE"). Quorum was an additional named insured on the Hospital's policy.²

In June 1996, David and Veronica Rodriguez filed suit in state court in Maverick County, Texas, on behalf of themselves and their minor daughter, Cristina. The Rodriguez family sued the Hospital and the obstetrician, three registered nurses, and the nurse practitioner present at Cristina's birth. The Rodriguez plaintiffs alleged medical malpractice during the delivery that left Cristina with severe mental and physical disabilities.³ The Hospital timely notified THIE of the lawsuit. THIE assigned a law firm to represent all the defendants.

In March 1997, the Rodriguez plaintiffs joined the Hospital's management company, Quorum, as an additional defendant. THIE assigned the same lawyer to represent Quorum, along with the previously named defendants. The joint representation proceeded until April 13, 1998, when Quorum asserted a conflict of interest and requested separate counsel. The parties dispute what happened next. THIE asserts that it offered Quorum separate counsel from its list of approved attorneys, but Quorum rejected the lawyer offered and insisted on an attorney who was not on THIE's list. Quorum agrees that THIE offered a lawyer, but asserts that this lawyer declined the representation and that THIE failed to offer a replacement.

The Rodriguez suit proceeded to trial in Eagle Pass, Texas, in November 1999. Quorum was represented by counsel it had selected without THIE's participation or involvement. Quorum's excess insurer, American Continental Insurance Co., paid the costs of Quorum's defense. Before trial began, the Rodriguez plaintiffs nonsuited all the defendants except Quorum. The parents, David and Veronica Rodriguez, nonsuited their individual claims against Quorum. The trial proceeded with Quorum as the only defendant, on claims for actual and exemplary damages for simple and gross negligence, on behalf of the minor child.

Plaintiffs tried the case on the basis of the Ninth Amended Petition, which alleged that Quorum committed twenty-four separate acts of negligence. The allegations included negligent hiring of untrained nursing personnel, failing properly to train nursing personnel, failing to enforce the Hospital's personnel policies, and negligently hiring and training the Quorum employees who managed the Hospital. The petition did not allege that Quorum was vicariously liable for the acts or omissions of the Hospital's medical staff or the obstetrician who attended the delivery, but who was not a Hospital employee. The petition did allege that Quorum was vicariously liable for the negligence of two of Quorum's own employees working at the Hospital under the Management Agreement: the Hospital Administrator and the Controller.⁴

The jury found that Quorum negligently performed services to the Hospital that "increased the risk of injury or harm to a patient of The Hospital" and proximately caused injury or harm to a patient "by reliance of The Hospital upon Quorum's undertaking to perform such services." The jury found Quorum 65 percent responsible for Cristina Rodriguez's injuries. The jury also found the attending obstetrician negligent and assessed comparative causation at 35 percent. The jury awarded $52 million in actual damages and, finding malice on the part of Quorum, awarded an additional $7.5 million in exemplary damages.

Plaintiffs settled with the obstetrician before the verdict. In an Amended Final Judgment, the trial court deducted the amount of the settlement and added pre-judgment interest, awarding actual damages of approximately $57 million before postjudgment interest. The trial court disregarded the jury's finding of malice and ordered that plaintiffs not recover exemplary damages against Quorum.

Quorum filed a declaratory judgment suit in federal district court, alleging that the indemnity provision in its Management Agreement required the Hospital to indemnify Quorum for the Rodriguez judgment and required the Hospital to defend Quorum in the Rodriguez suit. Quorum also sought a declaratory judgment that THIE had breached its duty to defend Quorum under the insurance policy and owed Quorum a duty to indemnify for the resulting judgment, up to the policy limits.

Both the 1990 and 1995 Management Agreements between the Hospital and Quorum contained the following indemnity provision:

Hospital agrees to indemnify and hold harmless Quorum, its Affiliates, and each of their shareholders, directors, officers employees, and agents ("Quorum Indemnified Party") from and against any and all losses, claims, damages, liabilities, costs and expenses (including reasonable attorneys' fees and expenses related to the defense of any claims), joint or several, which may be asserted against any of the Quorum Indemnified Parties or for which they may now or hereafter become subject arising in connection with the activity of the Hospital ("Quorum Claim"), including but not limited to: (i) alleged or actual failure by the Board to perform any of its duties hereunder, (ii) any pending or threatened medical malpractice or other tort claims asserted against Quorum; (iii) any action against Quorum brought by any of the Hospital's current or former employees or Medical Staff members; (iv) any act or omission by any Hospital employee, Medical Staff member, or other personnel; and (v) any violation of any requirement applicable to the Hospital under any federal, state or local environmental, hazardous waste or similar law or regulation; provided that such claims have not been caused by the gross negligence or willful or wanton misconduct of the Quorum Indemnified Party seeking indemnification pursuant to this Agreement.

The 1990 Management Agreement contained the following provision setting out Quorum's reciprocal indemnity obligation to the Hospital:

[Quorum] agrees to indemnify and hold harmless the Hospital and its shareholders, directors, officers or trustees ("Hospital Indemnified Party") from and against all losses, claims, damages, liabilities, costs and expenses (including reasonable attorney's fees and expenses related to the defense of any claims), joint or several, which may be asserted against any Hospital Indemnified Party ("Hospital claim"), as a result of any personnel or other action brought against the Hospital Indemnified Party by any Key Person [the Administrator and Controller] relating to any acts performed by such Key Person within the scope of his or her employment by [Quorum]; provided that such Hospital Claims have not been caused by the gross negligence or willful or wanton misconduct of the Hospital Indemnified Party seeking indemnification pursuant to this Agreement.

The 1995 Management Agreement contained this same provision, with one change. The 1995 Agreement contained the provision stating that Quorum would indemnify the Hospital for "losses, claims, damages, liabilities, costs and expenses" as a result of actions brought by a "Key Person." However, the 1995 Agreement added that Quorum would indemnify the Hospital for "losses, claims, damages, liabilities, costs and expenses" from claims asserted against the Hospital "as a result of ... the sole negligence of Quorum outside the scope of its employment; provided that such Hospital Claims have not been caused by the gross negligence or willful or wanton misconduct of the Hospital Indemnified Party seeking indemnification pursuant to this Agreement."

The insurance policy THIE issued to the Hospital provided, in relevant part, as follows:

[THIE] shall have the right and duty to defend any suit against the insured seeking damages because of such injury even if any of the allegations of the suit are groundless, false, or fraudulent. The company may make such investigation and, with...